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Where There's Smoke, There's Fire

Chris Morris, |Special to CNBC.com
Thursday, 19 Apr 2012 | 4:09 PM ET
People attend a rally in support of a proposal to legalize marijuana outside Oaksterdam University in Oakland, California, U.S., on Tuesday, Nov. 2, 2010.
Bloomberg via Getty Images
People attend a rally in support of a proposal to legalize marijuana outside Oaksterdam University in Oakland, California, U.S., on Tuesday, Nov. 2, 2010.

When federal officials raided a San Francisco Bay-area medical marijuana training school in April, it sparked outrage among supporters of the program and ruffled feathers of local officials.

The shutdown of Oaksterdam University, though, was yet another in an ongoing dispute between federal and local officials on the topic of legalized marijuana. It's one that has been escalating over the past year — but so far discussions between the state and feds have been rare.

"We're always open to being approached and developing a dialogue, but you have two instances of policies — one on a national level and another on the state level," says Arturo Sanchez, deputy city administrator for Oakland. "Our state constitution recognizes and legalizes the rights of patients to use medical cannabis. The conflict between the two policies makes [the situation] difficult."

While the legality of the drug is an issue officials continue to quibble over, few dispute its potential as a source of revenue. Dispensaries and growers have paid millions of dollars in taxes to communities and states where medical marijuana is legal. In March, Oakland — a city that is in such economic distress that it occasionally closes city offices to cut expenditures — gave approval for four new dispensaries in order to generate more tax revenue. The city also doubled the permit price to $60,000.

Dispensaries are expected to generate $1.4 million in business tax revenue in Oakland this year — as well as an additional $280,000 in sales taxes. Right now, however, the city is not budgeting for an increase in that amount despite the approval of new dispensaries.

"We are experiencing more of a saturation of market," says David McPherson, Oakland's tax and revenue administrator. "So we have not budgeted additional revenues yet until we can identity if there's new growth versus taking customers away from existing businesses."

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Although medical marijuana has been legal in California for more than 15 years, it's still considered an illegal substance under the federal Controlled Substances Act. And recently, federal officials seem to have been stepping up their enforcement tactics in the state.

Since the beginning of the year, five San Francisco dispensaries have shut down under pressure from federal officials. Since October, more than 200 California dispensaries have closed, with many citing pressure from federal officials, according to Americans for Safe Access, an activist group that lobbies for legalizing medical marijuana.

Federal officials say their focus is federal, not state, law.

"Just because a guy has a state license, federally that's still an illegal grow," says Todd Scott, a Drug Enforcement Adminstration agent. "That, in no way, is a shield."

The crackdown has been decried by San Francisco Mayor Edwin Lee.

"Since 1996, when Proposition 215 first passed, the State of California and our city have reaffirmed many times our support of legitimate medicinal use for people with serious illness," he said in a statement. "That’s why I am concerned about recent federal actions targeting duly permitted Medicinal Cannabis Dispensaries.

"Time and time again, the President of the United States has made it clear that the Justice Department has more important priorities than working to prevent patients from accessing this medicine. As long as San Francisco’s dispensaries and patients are operating within the guidelines set by then-Attorney General Jerry Brown in 2008, I agree with our current Attorney General Kamala Harris that raids should not occur."

The Oaksterdam raidwas just one of many by the federal government, but it has proved to be a rallying point. Days after the raid, lawmakers in five states called upon President Barack Obama to live up to his 2008 campaign promise to leave medical marijuana regulation up to the states.

"States with medical marijuana laws have chosen to embrace an approach that is based on science, reason, and compassion," officials said in an open letter. "We call on the federal government not to interfere with our ability to control and regulate how medical marijuana is grown and distributed. Let us seek clarity rather than chaos. Don’t force patients underground, to fuel the illegal drug market. ... Please respect our state laws. And don't use our employees as pawns in your zealous and misguided war on medical marijuana."

Among those signing the letter were Assemblyman Tom Ammiano (D-Calif.), state Sen. Jeanne Kohl-Welles (D-Wash.), state Rep. Antonio Maestas (D-N.M.), state Sen. Cisco McSorley (D-N.M.), Assemblyman Chris Norby (R-Calif.), state Rep. Deborah Sanderson (R-Maine) and state Sen. Pat Steadman (D-Colo.).

All told, 16 states and the District of Columbia have medical marijuana laws that conflict with the federal government's. And the tension that conflict has created has caused some states to slow the rollout of the drug.

New Jersey, for instance, legalized medical marijuana two years ago, but no patients have been able to obtain it. Similarly, Rhode Island halted the opening of medical marijuana dispensaries last September amid the threat of legal challenges.

"The U.S. Department of Justice, despite requests from the New Jersey attorney general, has refused to clarify its prosecution policy in states such as New Jersey that have legalized medicinal marijuana," says Donna Leusner, director of communications for the New Jersey Department of Health and Senior Services. "It was for this reason that the department invested so much time, energy and effort in developing a program that it hopes will withstand federal scrutiny."